July 24, 2024
Home Sales Are Slow. Does This Mean Housing Prices Will Go Down?

As prospective homebuyers wait for mortgage rates to drop, holding out the spring buying season, some home sellers are dropping their listing prices. In June, nearly 7% of sellers cut their asking prices, the highest percentage since November 2022, according to Redfin.

Though this is the first time since before the pandemic that homes have been sold in spring below asking prices, many buyers are still priced out of the market.

Overall, it’s been a sluggish season, with high mortgage rates and prices continuing to weigh on buyer demand. In May, the number of home sales fell 2.8% year over year, according to the National Association of Realtors.

The housing market is struggling to gain momentum, said Odeta Kushi, deputy chief economist at First American Financial Corporation. “Higher mortgage rates have a negative impact on both supply and demand — pricing out buyers who lose purchasing power and keeping some potential sellers rate-locked in,” Kushi said.

But some highly motivated sellers have become more flexible on asking prices to attract buyers, especially in areas where property insurance has skyrocketed, like Florida, said Erin Sykes, chief economist at Nest Seekers International.

As home price growth slows and housing inventory increases, buyers may finally see more options and better affordability.

Could home prices drop as sales slow this summer?

It’s common to see an uptick in home sales during the spring and early summer when warmer weather and the end of the school year make it a practical time for families to move. Over the past few years, however, things haven’t been that typical.

Mortgage rates and home prices are too high, keeping would-be homebuyers in hibernation mode. According to Lawrence Yun, chief economist at the NAR, home sales have seen little improvement since last year and are still at a near 30-year low.

Toward the end of May, mortgage applications were 10% below last year’s pace, according to the Mortgage Bankers Association. Homeowners who need to sell their properties quickly have little choice but to adjust their asking prices to attract buyers.

That means the housing market may be slowly rebalancing after a tumultuous few years. Inventory levels are gradually improving nationwide as homes stay on the market for longer, which could make for a slightly less competitive housing market during the rest of 2024.

“It’s still a seller’s market, but it could be in a more balanced condition by the year’s end,” Yun said.

While we’re not in a buyer’s market yet, potential homebuyers have more bargaining power than just a few years ago. You likely won’t need to waive things like inspections or appraisals, which was common practice during the pandemic. You may also find some flexibility around asking prices. 

“Home prices have become more negotiable over the last few months,” Sykes said. Coastal markets in Florida and New Jersey are already showing 5% to 10% more negotiability on list prices, she said.

Factors affecting today’s housing market

Today’s housing affordability crisis is due to a combination of factors, including elevated borrowing costs, rising home prices and limited housing supply. 

Mortgage rates are high

High mortgage rates have plagued the housing market for more than two years. At the start of 2022, the average rate for a 30-year fixed mortgage was close to 3%. Since then, it’s increased significantly (even climbing above 8% last fall) in response to high inflation and a series of rate hikes from the Federal Reserve.

Mortgage rates averaged above 7% throughout the spring, per data from CNET sister site Bankrate. Here’s how rising mortgage rates have impacted the monthly payments on a $400,000 house with a 10% down payment.

30-year fixed mortgage rate Down payment Monthly mortgage payment
Loan A 3% 10%  $1,851
Loan B 7% 10% $2,728
Source: CNET’s mortgage calculator

Home prices are still elevated

During the pandemic, there was a rush of homebuying demand without the supply to match. As a result, bidding wars became the norm, and home prices increased by more than 40%, according to the Zillow Home Value Index. Since then, price growth has slowed but not reversed.

“The combination of somewhat better supply and demand tempered by higher rates has helped price gains to soften,” said Keith Gumbinger, vice president of mortgage site HSH.com.

Housing shortages persist

Today’s high-rate environment isn’t helping with the nationwide housing shortage, which is entering its second decade. The majority of would-be home sellers have existing mortgage rates below 5%, so they aren’t inclined to swap to a new property at a higher rate. As mortgage rates fall, we’re likely to see more homes come onto the market.

The other piece of the inventory puzzle is new construction. Even though we saw one of the best years on record for new construction in 2022, there’s a deficit of around 4.5 million homes, according to Zillow.

What to expect in the housing market for the rest of 2024

There are a lot of moving parts — mortgage rates, inventory, home prices — and they’re all connected. 

The first domino to fall will likely be mortgage rates. As inflation moderates and the Fed begins to lower interest rates later this year, mortgage rates should improve. Most economic forecasts say the average rate on a 30-year fixed mortgage will end 2024 between 6% and 6.5%.

Lower borrowing costs should prompt more sellers to list their properties and (ideally) spark an uptick in new construction. This is already happening: 90% of markets have seen inventory levels improve year over year, according to Black Knight. The biggest increases were across Florida, as well as Austin and Denver.

With more inventory on the market, Yun expects home price growth to stabilize at around 2% to 3% on an annual basis.

While a sudden drop in mortgage rates would incentivize a lot of buyers to come off the sidelines, it wouldn’t immediately solve the housing shortage.In fact, buyers flooding the market to compete over limited inventory could cause home prices to surge again.

Ideally, housing prices and mortgage interest rates will move toward equilibrium at the same pace. However, this will continue to depend on a variety of economic factors. If the labor market slows and unemployment rises significantly, demand for housing could drop, leading to lower prices. Political policies could also come into play, especially with the upcoming general election this year.

Should you wait to buy a house?

Buying a home is a massive financial (and personal) decision, and many people are unsure whether it’s the right time. Even if you ask a real estate agent whether you should wait or buy a house, it’s an impossible question to answer.

Experts recommend against trying to time the housing market. It’s better to base your decision on your own personal and financial circumstances. Here’s what to consider: 

What’s your credit like? The higher your credit score, the more likely you are to secure a lower interest rate on your future mortgage. Even a difference of a few tenths of a percentage point can save you tens of thousands of dollars in interest over the long run, making homeownership more affordable.

Do you have a stable income and job security? Without a stable income, it may be difficult to comfortably afford your monthly mortgage payments and the other costs of homeownership.

How long do you plan to stay in your home? Home values tend to appreciate over time. The longer you stay in your home, the more you’ll benefit from those value gains. Many homeowners rely on the equity they’ve built up via paying off their mortgage and home price appreciation to fund the down payment on their next property.

Do you have an emergency fund? Before taking out a mortgage, experts recommend you have an emergency fund that can cover several months of living expenses (including housing costs) in the event of a medical emergency or job loss.

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